Industry Insiders Expect Substantial Consolidation In Cannabis

ICR Inc. held its retail conference in Orlando, FL this week. This “invitation only ” event is mostly retail operations and restaurant/food businesses. It is heavily attended by the investment community looking to get updates on big names like Lululemon (LULU), but also to see where the buzz is for up and coming private companies. This year the conference started to include cannabis companies in the mix.

On the public side, MedReleaf’s (MEDFF) CEO Neil Closner made a presentation and on the private side emerging company Acreage Cannabis Holdings (formerly High Street Capital) presented to a packed room. MedMen’s Jim Carmack was part of a panel that was hosted by Cowen & Co. analyst Vivien Azer, which included MedReleaf, Acreage and me for Green Market Report. There was tremendous interest in the industry from the crowd that had little awareness of the size and growth of cannabis companies.

In his presentation, Closner said that he expected substantial consolidation and the winners will emerge. He noted that MedReleaf already has a 20% market share and he expects his company to be one of the winners. Revenue for the fiscal year of 2017 increased 109% over the fiscal year 2016. For the first half of fiscal year, 2018 revenues are up 4% versus the same time period for 2017.

Closner believes his company will be a winner because most of his competitors had failed to turn a profit. MedReleaf has taken a page from the pharma playbook and zeroed in on patients that would result in the highest volume of prescriptions and usage. The company has also focused on being a low-cost producer. MedReleaf’s cash cost per gram is $1.46, but its average selling price per gram is $9.34 giving it an average 70%+ adjusted contribution margin.

Closner also said he believes international markets will be substantially larger than Canada’s recreational marijuana market, which is why the company is putting so much effort in Germany and Brazil. He expressed relief that MedReleaf had not acquired or taken a stake in any American companies following the move by Sessions to rescind the Cole Memorandum.

Acreage Cannabis Holdings is invested in cannabis companies in 11 different states. CEO Kevin Murphy said, “We will see massive consolidation in this business. We will be on that podium and that is a fact. We are not going to give up this position anytime soon.” He said that his company estimates it will do $130 million in revenue in 2018 and projects that will rise to $3 billion by 2020. He also suggested that the company planned on going public this year.

MedMen’s Carmack agreed that not all cannabis companies will succeed. MedMen now has 13 facilities under its management. Its strategy is to identify key dispensaries, acquire them and then turn it into a MedMen branded retail operation. The company also raises millions for investment purposes.